Which one should you do first— pay off debt or save money?

If you’re like most people, you probably have credit card debt, personal loans and a mortgage. In addition to all of that, your savings may be… limited. If you save money first, you’re not lowering your debt but if you pay off your loans first, then how can you save money? It’s enough to make your head spin!

Figuring out this financial stuff can be tricky but here are some guidelines to help you figure out your priorities.

Pay off debt or Save?

Start With An Emergency Fund

If you focus on paying off your debt and something goes wrong, one swipe of your credit card and you’re deeper in the hole than ever before.

Financial expert, Dave Ramsey, recommends building an emergency fund of $1000 that you can use in the event that an unforeseen event occurs. Say your refrigerator stops working or your car needs repairs, you can use this money to cover these expenses instead of your credit card or having to get a loan.

It may seem daunting to save $1000 when you’re already struggling to pay all of your bills. Don’t think you have to save that emergency fund right away. Obviously the sooner the better but take a year to come up with the money. That means you only need to save $20 each week. Suddenly $1000 doesn’t seem so formidable, does it?

Saving $20 per week can be easier than you think. Pack lunch instead of purchasing or skip the daily trip to the coffee shop and take your own java to work. Small changes can make a huge impact.

See other ways you may be spending more than you realize in this post.

If the thought of going without an emergency fund for a whole year petrifies you, there are ways to save it faster. Get a part-time job, sell items you no longer need or cut back on utility bills to come up with the money quickly.

Keep your emergency fund in a separate bank account where you can still access it quickly but it won’t be quite so easy for you to spend it. Be sure to use it for true emergencies only.

Next, Pay Off Debt

After you have saved your emergency fund, the next step is to start paying off your debt. Some financial experts recommend beginning with the loans that have the highest interest rates. This is a logical way to go about it but I recommend Dave Ramsey’s debt snowball approach.

The debt snowball method is where you pay off the smallest loan you have first. Once you have paid that off, move onto the next smallest one. Using this technique helps you to stay motivated because you will actually be seeing progress in your mission to get out of debt.

First assess your budget to determine how much money you can spare each month to pay off your debt. You can use this free Monthly Budget Workbook printable to do this. Ensure you always have enough to pay the minimum balance on all your other loans. As you pay off each loan, take that money and use it to pay the next one in succession.

Even if you don’t have much to spare to pay off your loans, keep at it. It’s slow going but the reward is that feeling of gratification when you are finally debt-free.

Start Saving

When you have paid off all of your debt except the mortgage, it’s time to really start saving. Most experts recommend having a minimum of three months of savings. This is a great amount to have in the event of job loss or some other major occurrence. You don’t want an emergency to obliterate all the progress you have made climbing out of debt only to slide right back in!

It can be so liberating to finally be out from under all that debt but when you have free cash, make sure you don’t get carried away. It’s crucial that you do not overspend. Also, make a pact with yourself that you will NOT take on any more debt.

Now that you know what your priorities are, make a plan and get it done. There is nothing like being debt-free and having savings to spare so you can enjoy your life even on the occasional rainy day.